CAIRO: Egypt’s net foreign reserves plunged by $1.69 billion in February, their biggest one-month decline in over a decade as political turmoil drove capital out of the country and put pressure on its currency.
The central bank played down the decline but analysts said the figure did not seem to reflect the full extent of capital outflows from the Egyptian economy.
A fall in the reserves is the best proxy for the cost under Egypt’s managed float of moderating the pound’s fall over the past month — around 1.4 percent compared to a roughly 5 percent fall in the reserves.
The street protests that began on Jan. 25 and eventually toppled president Hosni Mubarak scared away tourists, foreign investors and to a lesser extent remittances from workers abroad.
Reserves fell to $33.32 billion at the end of February from $35.01 billion a month earlier, the central bank said on its website on Monday.
"It was not big, considering what Egypt just went through," central bank deputy Governor Hisham Ramez said by telephone.
He declined to go into specifics on how the reserves were drawn down.
The central bank intervened aggressively on Feb. 8 to support the pound and at the time one trader estimated the size of the intervention at "not less than $1 billion and not more than $1.6 billion."
Analysts and bankers said both Egyptians and foreigners transferred large amounts of money out of the country in February.
Some LE 22.5 billion in treasury bills matured in February, and bankers said few foreign investors rolled over the portion they were holding, but rather cashed out and transferred the funds into dollars and out of the country.
Foreign investors, taking advantage of high yields and a relatively steady currency, had been avid buyers of Egyptian treasury bills, and at the end of November held bills worth LE 61.30 billion ($10.4 billion), according to central bank figures.
A central bank statement estimated on Saturday that the balance of payments would have a deficit of $3 billion in the Jan-March quarter compared to a surplus of about $557 million in the Oct-Dec quarter.
Before the crisis, Egypt had been receiving about $1.15 billion a month from tourism, $375 million a month from foreign direct investment and $1 billion a month from worker remittances and other private transfers, according to central bank figures.
The pound is hovering at around LE 5.9 against the US dollar, weakening recently along with foreign reserves.
“The Egyptian pound is expected to be challenged right now and its future depends on how soon Egypt stabilizes its political situation,” Ahmed Galal, managing director of the Economic Research Forum, told Daily News Egypt.
“Capital flights came from foreigners and foreign currency coming to Egypt went away due to loss of tourists,” he added.
Galal also attributes the Central Bank of Egypt intervening to help the spiraling pound strengthen a little.
“The Central Bank had two choices: enter the market using reserves to buy pounds and sell dollars or watch the pound weaken,” he explained. “They actually chose both by allowing the pound to decline a little and then used the international reserves to bring it back up.”
Galal adds that the decline of exports contributed to the weakening of the pound due to the loss of foreign currencies. “There are fewer dollars than before and are scarce compared to the pound,” he told DNE.
The Egyptian stock market is currently still closed for the time being with its reopening date having been pushed back multiple times.
“Short run pressure will be put on the pound when the stock market finally opens, but to what extent is not known right now,” he said.
As for the future of the pound, Galal says it will be decided by the political stabilization in the country.
“The decision of the holders of dollars (in the form of shares or treasury bills), will depend on their opinion of the situation and its future,” he said.
“If they think the situation will stabilize, they won’t run; but if they think it will not stabilize anytime soon, they will run fast,” he added, “risk lovers will stay in Egypt and risk neutrals will analyze the situation and those who are afraid of risks will take their money elsewhere.”
The future of the pound has been said to be in the hands of the political situation right now.
“In the end, the political transformation that is going on will only generate more stability and a better economy; it is a short term small loss for a long term big gain,” he said.